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The cryptocurrency space had been plagued with confusion about the difference between currency and tokens. While those definitions have achieved some clarity, there is now a new debate about how to distinguish between different types tokens. Terms like “initial coin offering” (ICO) and “token generation event” (TGE) have been thrown around almost interchangeably by the media, but few people realize there is a vital and significant distinction between them. One has come under scrutiny by the SEC, and one has not. If you’re an individual token investor, or a company considering getting into the cryptocurrency space for the first time, it’s important to know the difference.
First of all, it’s helpful to understand the main difference between Bitcoin and Ethereum. While Bitcoin is mostly suited to be a digital store of value, Ethereum is more of a platform to build decentralized applications. Digital money (like Bitcoin) can be represented on the Ethereum blockchain, but that is certainly not Ethereum’s primary function.
Tokens built on the Ethereum blockchain operate best when they represent a specific utility, unlike coins that generally just represent value. SingularDTV’s CEO Zach LeBeau popularized this idea in his article “What’s the Difference Between an ‘ICO’ and a ‘Token Launch’?:”
Bitcoin produces “coins.” Ethereum generates “tokens.” A “Token Launch” is an Ethereum thing. An “ICO” is a Bitcoin/altcoin thing. Coins really only have one utility — to act as simple stores of value with limited-to-no other functionality.
Put simply, a coin does one thing, store value, while tokens can do many things. For this reason, coins have come under scrutiny by the SEC because they can easily slip into the security category, even if the issuing company never intended them to operate that way.
It is probably best if the cryptocurrency community began to phase out the term “ICO.” Our goal is not, and should not, be to issue securities like a private company going public with an IPO. Therefore, if we are moving away from calling them ICOs then, we need to have a clear definition of a Token Generation Event. What does a good TGE look like?
There are many ways to define TGE in a way that avoids security terminology, and it will look different from company to company based upon what they are trying to accomplish. However, Reuben Bramanathan, Blockchain Lawyer and Product Counsel for Coinbase sums the issue up well in his article “The perfect token sale structure:”
A properly designed token sale doesn’t promise ‘investment returns,’ ‘dividends’ or ‘profits.’ Instead, it focuses on selling a digital asset that will have a clear use case in a decentralized application, as a means of both incentivizing development and solving the chicken-and-egg problem for the network. A properly designed token actually serves a purpose: it is required in order to participate in the network, rather than just being a funding mechanism.
Ironically, the popularity of Ethereum’s early ICO definition was a significant part of the SEC’s quick intervention. Once companies realized they only had to create a nice looking website, throw together a shoddy whitepaper, issue an ERC20 token, and raise millions of dollars in mere minutes, scam ICOs abounded. And why not? Arguably, it has never been easier to raise money in all of history. It is a small wonder the SEC intervened. Abuse of the system quickly became the norm.
The innovation of cryptocurrencies may very well be the greatest of the past 200 years. I would highly encourage you to consider participating in the movement, as a company or as an individual. But before you begin, you must understand the difference between an ICO and TGE. Make sure you’re investing in utility tokens! Don’t unnecessarily create issues between you and the SEC.
Strategic Coin exists because of problems like these. We’re here to help. Terminology can be difficult, and we understand that an “initial coin offering” may not actually be a security offering but a utility token generation event. Until the cryptocurrency community comes together to clearly define what terms actually mean, we are here for your benefit and to be your guide.
If you’d like to get started investing in cryptocurrency or TGEs, the easiest way is with Coinbase. Get $10 of free Bitcoin when you use this link — it’s my referral link — and get started now!
